Patrick McDonnell was charged with nine counts of wire fraud in a federal court in Brooklyn for conducting a purportedly fraudulent virtual currency scheme from November 2014 through January 2018. 

Last summer, a federal court in Brooklyn, New York, entered an order of permanent injunction, imposed a civil penalty of approximately US $871,000, and ordered restitution of approximately US $290,000 against Mr. McDonnell, and a company he owned and controlled— Cabbagetech Corp. – in connection with a lawsuit brought by the Commodity Futures Trading Commission that charged the defendants with unlawfully soliciting customers to send money and virtual currencies for virtual currency trading advice and for the discretionary trading of virtual currencies. However, alleged the CFTC, the defendants did not provide the promised services and misappropriated their customers’ funds. In its decision, the district court upheld the authority of the CFTC to prosecute cases involving allegations of fraud in connection with cryptocurrencies. (Click here for details in the article “Federal Court Enters Final Judgment Against Alleged Virtual Currency Fraudster; Confirms CFTC Authority to Bring Enforcement Action” in the August 26, 2018 edition of Bridging the Week.)

The criminal indictment against Mr. McDonnel parallels the CFTC enforcement action. 

In other legal and regulatory developments involving cryptoassets:

  • Ex-CFTC Head Calls for Congress to Close Gaps in Cryptoasset Regulation: Former CFTC Chairman Timothy Massad published a working paper under the auspices of the Brookings Institute calling for Congress to appoint the Securities and Exchange Commission – or alternatively the CFTC – as the national watchdog of all cryptoassets and related activities. Mr. Massad argued that such action was necessary to close a gap in cryptoasset regulation that is creating “broader societal risks with respect to cyber security and illicit payments.” In his paper, Mr. Massad also recommended that, while new legislation is pending, the Financial Stability Oversight Council or the US Department of Treasury should issue a report recommending how Congress might “strengthen and clarify” relevant regulation and that the cryptoasset industry should develop its own self-regulation standards.  
  • Japanese Advisory Group Urges Regulation Enhancements For Cryptoasset Businesses: Japan’s Financial Services Agency published an English-language version of a report composed by leading Japanese academicians, attorneys, and business persons, among others, that made recommendations to enhance the regulatory framework regarding cryptoassets in Japan. Among other things, regulations should address unfair acts in virtual currency spot trading; custodial services for virtual currencies; the security of virtual currencies by depositories; disclosure requirements for initial coin offerings; registration requirements for services providers offering contracts for differences involving virtual currencies; and mandatory risk disclosures by offerors of virtual currencies. The report also recommends that companies involved in ICOs should be regulated like ordinary securities companies.  
  • Another Day, Another BitLicense: Tagomi Trading LLC, a subsidiary of Tagomi Holdings Inc., obtained a BitLicense and a money transmission license from the New York State Department of Financial Services. According to the DFS, Tagomi Trading, an institutional-grade aggregation platform, was approved to offer services in money transmission, trade routing and order execution for virtual currencies that include, bitcoin, ether, bitcoin cash and litecoin. New York’s BitLicense was introduced in 2015 to establish minimum standards to help ensure customer protection, cybersecurity and anti-money laundering compliance by persons involved in a virtual currency business involving New York or a NY resident. NYDFS has approved 18 BitLicenses to date. (Click here for background on NY’s Bitlicense in the article “NYDFS Issues BitLicense Framework for Regulating Virtual Currency Firm” in the June 5, 2015 edition of Bridging the Week.)  
  • Cryptoassets Among IOSCO’s 2019 Priorities: The International Organization of Securities Commissions indicated that, among its priorities in 2019, it will consider the trading, custody and settlement, and exposure of investments funds to cryptoassets. IOSCO will specifically consider the regulation of cryptoasset trading platforms and investment funds with cryptoasset exposure. IOSCO also indicated that, in 2019, it will focus on artificial intelligence and machine learning; passive investing and index providers; retail distribution and digitalization; sustainable finance; outsourcing and third-party providers; and market fragmentation in derivatives and securities markets, among other priorities.